How Effective Were The Financial Safety Nets In the Aftermath of Katrina?

1. How Effective Were The Financial Safety Nets In the Aftermath of Katrina? Sherrie L.W. Rhine*, Presenter Federal Reserve Bank of New York Office of Regional and Community Affairs and Julia S. Cheney Federal Reserve Bank of Philadelphia Payment Cards Center NCCC-52 Family Economics Presentation October 5, 2006 *The views expressed are those of the presenter and are not necessarily those of the Federal Reserve Bank of New York, the Federal Reserve Bank of Philadelphia, or the Federal Reserve System.

2. Purpose • Describe the U.S. financial system’s response to the destruction caused by Hurricane Katrina • Examine how financial safety nets and relief efforts helped meet consumers’ needs in the aftermath of the storm • Highlight the increased importance of electronic payments in providing liquidity and restoring financial services in the wake of catastrophic events • Discuss the important role that financial educators and counselors have in educating unbanked and lower-income consumers so they also can enjoy the benefits offered by financial safety nets

3. Financial Sector Response • Federal Reserve quickly moved cash to affected areas, provided check clearing services from alternative locations, and maintained the discount window • Financial institutions and payment networks shifted data systems and performed clearing and settlement operations from alternative locations • Bank regulatory agencies encouraged financial institutions to: • be flexible in providing financial services to noncustomers to the extent consistent with safe and sound banking practices • consider actions providing financial relief to the region’s residents (e.g., waive certain fees and give credit payment deferrals)

4. 1ST Lessons Learned • Consumers with established banking relationships were able to quickly: • access their financial accounts and associated liquidity • obtain financial services provided by financial institutions • receive financial relief made available by lenders and financial institutions • The unbanked – those without checking or savings accounts – were more vulnerable to financial disruptions than were residents with established bank relationships

5. Katrina’s Most Vulnerable • According to evacuees surveyed at the Houston Astrodome1 • 98% from the New Orleans area • 74% family income less than $30,000 (LMI) • 65% unbanked (no checking or savings acct.) • 72% did not own credit cards • 96% members of a minority group 1 The survey of Katrina evacuees was undertaken by the Washington Post, the Kaiser Family Foundation, and Harvard School of Public Health, www.kff.org/newsmedia/7401.cfm.

6. Why Were Lower-Income Consumers More Financially Vulnerable? • Inability to easily access financial services and liquidity • mail disruptions caused difficulties in receiving income and benefits checks (e.g., payroll, SS, SSI, & child support) • limited or no savings to draw upon in emergency situations • check cashers and other money services businesses severely damaged or destroyed • lack of transportation orhousing outside the New Orleans and Gulf Coast region

7. Delivery of Financial Relief • Federal & state agencies and nonprofit organizations brought financial relief to those most affected by Hurricane Katrina • The use of prepaid cards reflected the general trend toward electronic payments • Red Cross (300,000 prepaid cards in amounts ranging from $360 - $1,565) • FEMA (roughly 10,000 prepaid cards, each in the amount of $2,000 for a total of $20 million) • States’ electronic benefits transfer (EBT) programs (e.g., Louisiana provided food and relief assistance to more than 280,000 additional families)

8. Why Branded Prepaid Cards? • Lower cost option than cash or check disbursements • Quicker way to get financial relief to unbanked families • Safer and easier delivery method than cash or checks • Branded cards are widely accepted in the national marketplace

9. 2nd Lessons Learned • Branded prepaid cards can be a particularly useful way to deliver financial relief, especially to unbanked and lower-income disaster victims • Electronic payments can provide more than convenience to consumers, especially in disaster situations

10. Summary • Unbanked consumers are more financially vulnerable than banked consumers to natural and manmade disasters • lack of easy access to financial services, income, and/or liquidity/credit • Banked consumers also are vulnerable when: • there is little, if any, savings cushion • wage/salary, child support, pension, SS, and SSI benefits, and other income sources are not directly deposited into transaction account • Trend toward electronic payments has important implications for banked and unbanked consumers • direct deposits, electronic transfers of funds • ATM and debit transactions • electronic bill payments and on-line transactions

11. Potential Educational Strategies

12. What do consumers need to know to be more “financially ready” for natural or manmade disasters ? • Will consumers have access to their wage/salary and other income? • Where can checks be cashed? • How will bills get paid? • If no credit card, how will car rental, hotel lodging, and similar products and services be purchased? • Are savings available for unexpected expenses? • How close at hand is a picture ID and proof of residency? • Will consumers know that it is in their best interest to provide billers, including financial institutions, contact information when relocation occurs?

13. How well does our financial education curriculum and materials explain new financial services products and electronic transactions ? • Financial educators and counselors have an important role in explaining to consumers the costs and benefits from using different types financial services products, with an emphasis on electronic applications and functions • A few examples of topics are: • traditional banking relationships and/or prepaid card accounts • electronic payments (POS and ATM) • savings as a financial cushion and asset building tool • use of direct deposit and electronic funds transfer, including remittance funds transfers

14. Presenter Contact Information Sherrie L.W. Rhine Office of Regional and Community Affairs Federal Reserve Bank of New York sherrie.rhine@ny.frb.org The paper is available at: http://www.phil.frb.org/pcc/HurricaneKatrinaJan06.pdf UPCOMING IN 2007: Financial Education Video “Lessons from the Storm: Banking for Safety” Produced and Distributed By Community Affairs Federal Reserve System